The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic. The Coronavirus Economic Stabilization Act of 2020 (CESA), at Title IV, Subtitle A of the CARES Act, authorizes the Secretary of the Treasury to, among other things, establish and administer a program of loans, loan guarantees, and other investments to provide liquidity to States and municipalities related to losses incurred as a result of coronavirus. On April 9, 2020, pursuant to CESA and Section 13(3) of the Federal Reserve Act, the Federal Reserve and the U.S. Treasury Department approved the establishment of a $500 billion Municipal Liquidity Facility (MLF) and, on that date, the Federal Reserve published a term sheet outlining the structure and requirements of the MLF. This update summarizes the terms of the MLF and outlines certain matters to be analyzed and considered with respect thereto.
Background
The MLF will support lending to the following:
- U.S. states and the District of Columbia (together, “States”);
- U.S. cities with a population exceeding one million residents (“Cities”); and
- U.S. counties with a population exceeding two million residents (“Counties”).
The Department of the Treasury, using funds appropriated to the Exchange Stabilization Fund under section 4027 of the CARES Act, will make an initial equity investment of $35 billion in a special purpose vehicle (SPV) in connection with the funding of the MLF. The SPV will have the ability to purchase up to $500 billion of Eligible Notes.
Program Basics
- Eligible Issuers: A State, City, or County (or an instrumentality thereof that issues on behalf of the State, City, or County for the purpose of managing its cash flows), subject to review and approval by the Federal Reserve. Only one issuer per State, City, or County is eligible.
- Eligible Notes: The following notes are eligible for purchase by the SPV, subject to review and approval by the Federal Reserve:
- Tax anticipation notes (TANs);
- Tax and revenue anticipation notes (TRANs);
- Bond anticipation notes (BANs); and
- Other similar short-term notes issued by Eligible Issuers, provided that such notes mature no later than 24 months from the date of issuance.
- Pricing: Based on an Eligible Issuer’s rating at the time of purchase. [Details to be provided by Federal Reserve at a later date.]
- Mechanics; Risk Sharing: Under the MLF, a Federal Reserve Bank (FRB) will commit to lend to the SPV on a recourse basis. The SPV will purchase Eligible Notes directly from Eligible Issuers at the time of issuance. The FRB will be secured by all the assets of the SPV.
- Limit per State, City, and County: The SPV may purchase Eligible Notes issued by or on behalf of a State, City, or County in one or more issuances of up to an aggregate amount of 20% of the general revenue from own sources and utility revenue of the applicable State, City, or County government for fiscal year 2017. States may request that the SPV purchase Eligible Notes in excess of the applicable limit in order to assist political subdivisions and instrumentalities that are not eligible for the MLF.
- Requirements: Relevant legal opinions and disclosures will be required as determined by the Federal Reserve prior to the purchase of Eligible Notes.
- Origination Fee: The Eligible Issuer must pay 10 basis points of the principal amount of the Eligible Issuer’s notes purchased by the SPV. May be paid from the proceeds of the issuance.
More to Come
The Board of Governors of the Federal Reserve System and Secretary of the Treasury has reserved the right to make adjustments to the terms and conditions summarized above.
The facts, laws, and regulations regarding COVID-19 are developing rapidly and frequently changing. Since the date of publication, there may be new or additional information not referenced in this update. JW will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns.
